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A semi-analytical approach to Canary swaptions in HJM one-factor model

Author

Listed:
  • Henrard Marc

    (Bank for International Settlements)

Abstract

Leveraging the explicit formula for European swaptions and coupon-bond options in HJM one-factor model, we develop a semi-explicit formula for 2-Bermudan options (also called Canary options). We first extend the European swaption formula to future times. We are able to reduce the valuation of a 2-Bermudan swaption to a single numerical integration at the first expiry date. In that integration the most complex part of the valuation of the embedded European swaptions has been simplified in such a way that it has to be performed only once and not for every point.

Suggested Citation

  • Henrard Marc, 2003. "A semi-analytical approach to Canary swaptions in HJM one-factor model," Finance 0310008, EconWPA, revised 25 Nov 2004.
  • Handle: RePEc:wpa:wuwpfi:0310008
    Note: Type of Document - LaTeX; prepared on Linux; to print on HP;
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    File URL: http://econwpa.repec.org/eps/fin/papers/0310/0310008.pdf
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    Cited by:

    1. Marc Henrard, 2005. "Inflation bond option pricing in Jarrow-Yildirim model," Finance 0510027, EconWPA.

    More about this item

    Keywords

    Bermudan option; swaption; bond option; HJM model; one-factor model; explicit formula; numerical integration.;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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